Introduction to Securitization

ADVERSE IMPACT ON BANKS

The Bank for International Settlements (1992) expressed concern that because nonbank financial institutions are exempt from capital requirements, they will have a competitive advantage in investing in securitized assets. This could lead to some pressure on the profitability of banks.

In addition, because asset securitization enables banks to lend beyond the constraints of the capital base of the banking system, there is the potential for a decline in the total capital employed in the banking system. This would increase the financial fragility of not only a country’s financial system, but also the financial fragility of the global financial system because a smaller capital base could not absorb substantial credit losses by the banking system. While this concern may not be applicable in all countries, it would be in countries where banks have traditionally been the dominant financial intermediary.

There have been several studies that have investigated the impact of risk-transfer that takes place as a result of a securitization by a bank. The findings are mixed. While some researchers find that risk is reduced (see, for example, Greenbaum and Thakor, 1987), others find that because the assets remaining on a bank’s balance sheet may be lower quality after a securitization, the risk is increased (see, for example, Wolfe, 2000 and Murray, 2005). An argument put forth by Cantor and Rouyer (2000) is that a bank employing securitization successfully shifts credit ...